Fast recovery for Spanish economy 'remote': OECD

Spain is engulfed in a long recession with little hope of a quick recovery, the OECD club of industrialised nations says.

Spain must quickly fix its banks to avert the "substantial risk" of being cut off from external financing and plunging into an even deeper recession, the body has warned.

"The economy is undergoing a prolonged recession," the Organisation for Economic Cooperation and Development said in a report, citing the 2008 global financial crisis and the bust of a Spanish housing boom.

"The prospect of an immediate recovery remains remote," the OECD said, noting that people and businesses were struggling to repay debts and the nation was stuck in a debt crisis.

Addressing Spain's 25 per cent unemployment rate, the highest since the return to democracy after the death of general Francisco Franco in 1975, the OECD urged drastic labour market changes.

It called for cutting compensation for unfair dismissal, considering abolishing an extension of industry-wide collective bargaining, and more training and job search help for the young.

Spain's economy has been shrinking for 15 months, with output slumping 0.3 per cent in the third quarter, official data show, and the recession is expected to last right through 2013.

The OECD is forecasting Spain's gross domestic product will shrink 1.3 per cent in 2012 and decline by another 1.4 per cent in 2013 before a weak pickup of 0.5 per cent in 2014.

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Spain's "immediate policy priority" is to restore trust in banks by fixing weak balance sheets, making orderly resolution of non-viable banks, and shifting bad assets into a new bad bank, the body said.

Spain's banks are struggling with loans turned sour after the property crash.

Eurozone powers agreed in June to extend to Madrid an emergency rescue loan of up to €100 billion to fix their balance sheets and reform the sector.

Now, Spain also is pondering whether to apply to the eurozone's bailout fund for a sovereign rescue, which would open the way for the European Central Bank to buy Spanish bonds and curb Madrid's borrowing costs.

OECD secretary general Angel Gurria called for Spain's European partners to make a declaration they would support Madrid in any bailout request.

"The thing we need now is to ask that Spain's European partners, given its performance, make an unequivocal declaration that in case Spain asks for support, that this support will be given," he told a news conference.